Arthur Ang just graduated with a Computer Engineering degree and secured a new job with a starting annual salary of $36,000. There are a few things that he would like to do with his newfound "wealth."
As a fresh graduate, he needs to begin repaying his student loans (amounting to $20,000) and reduce some outstanding balances on his credit cards (amounting to $5,000). Arthur also needs to purchase a car to get to work and would like to put money aside to purchase an apartment in
the future. Last, but not least, he wants to put some money aside for his eventual retirement. He would like to do some financial planning for which he has selected a 5year time frame. At the end of 5 years, he would like to have paid off his current student loan and credit card debt,
as well as have accumulated $40,000 for a down payment on an apartment. If possible, Arthur would like to put aside 10% of his take home salary for retirement.
He has gathered the following information to assist him in his planning:
? Student loans are typically repaid in equal monthly installments over a period of five years.
The interest rate on Arthur's loan is 8% per year compounded monthly.
? The monthly minimum credit card payments are usually computed using a 5year repayment period. The interest rate on Arthur's credit card is 18% per year compounded monthly.
? Car loans are usually repaid over three, four, or five years. The interest rates on a car loan can be as low as 2.9% (if the timing is right) or as high as 12%. As a first time car buyer, Arthur can
secure a $15,000 car loan at 9% per year compounded monthly to be repaid over 60 months.
? Arthur's parents and older siblings have reminded him that his monthly takehome pay will be reduced by CPF contributions. He should not count on being able to spend more than 80% of his gross salary.
a) After Arthur's car is paid off, he plans to continue setting aside the amount of his car payment to accumulate funds for the car's replacement. If he invests this amount at rate of 3% per year compounded monthly, how much will he have saved by the end of the initial 10year period?
b) If Arthur is more daring with this retirement investment savings and feels he can average 10% per year compounded monthly, how much will he have accumulated for retirement at the end of the 10year period?
As Arthur's friend, you have been asked to review his financial plans. How reasonable are his goals?
Support your findings with appropriate computations using Excel software and prepare a
Powerpoint presentation for your client. State your assumptions clearly.